Compliance in bidding for procurement at SOEs

Bidding, or tendering, is one of the key areas in compliance management of central enterprises, as has been emphasised since 2018 in both the Measures for the Compliance Management of Central Enterprises and the Guidelines on the Compliance Management of Enterprises’ Overseas Operations.

For state-owned enterprises (SOEs) bidding should observe not only the Civil Code, the Bidding Law, the Law on State-owned Assets of Enterprises and other general laws and regulations, but also special provisions on SOE bidding, local regulations and normative documents on bidding-based procurement of provincial and municipal regulatory agencies for state-owned assets, as well as SOE corporate compliance policies.

This article demonstrates that SOEs should pay special attention to the following compliance matters when bidding for procurement.

Identify projects where bidding is required.

Bidding is a standardised method for procurement, with strict requirements and restrictions imposed on the process. The Bidding Law not only sets out the principles and norms governing all bidding activities in China, but also clarifies that the scope of compulsory bidding covers the entire process of a construction project.

This includes survey, design, works, supervision, and goods and services related to project execution. Exceptions are review of working drawings, cost consultation and third-party testing services.

Article 3.3 of the Bidding Law also stipulates that, where the law or State Council defines the scope of other projects subject to bidding, such requirements shall prevail. Therefore, bidding is a required process for certain construction projects, but it does not end there.

Where other types of SOE procurement projects are subject to bidding as required by law or the State Council, the bidding process should also apply.

For example, according to article 11.3 of the Regulations on the Management of Toll Roads, toll road construction projects should be announced to the public, with investors selected by means of bidding. In other words, highway concession projects are invariably subject to bidding.

Avoid entry into any agreement that deviates from the substantive content of contract.

The Bidding Law stipulates that the project owner and successful bidder shall not enter into any other agreements that deviate from the substantive content of the awarded contract.

While this law provides no definition of “substantive content”, according to general rules on contracts under the Civil Code, substantive changes to contents of offer include changes in the subject matter of the contract, quantity, quality, price or remuneration, time limit, place and method of contract performance, liability for breach of contract and dispute resolution methods.

Also clarified in article 2 of the Interpretation of the Supreme People’s Court on Issues Concerning the Application of Law in the Trial of Cases Regarding Disputes over Construction Contracts (I), substantive content of a project includes project scope, construction period, project quality and project price.

However, certain local judicial interpretations have veered on the opposite side.

According to them, if the project owner and the contractor entered into any supplementary agreement, meeting minutes and correspondences – or if other negotiation records in writing contain changes to the project period, project price or project nature due to adjustments to design choices or project plan indices – such written documents should not be considered as other agreements that deviate from the substantive contents of contract.

Effectively map the scope of stakeholders ineligible for bidding.

Is a company controlled by an SOE, or a minority-owned subsidiary, eligible to bid for the SOE’s project? This question challenges the interpretation to article 34 of the Regulations on the Implementation of the Bidding Law, which provides that any corporation, organisation or individual with a stake in the project owner, or vice versa, that may affect the fairness of bidding, shall not participate.

Entities controlled by the same person, or those with intersecting shareholding or management structures, shall not participate in the bidding for the same bid section of a project or, if it is not divided into sections, the same project. According to relevant regulations and judicial decisions, the scope of stake consists of equity relationship, management relationship, personnel relationship, contractual relationship, and other relationships.

The above-mentioned article also clarifies that the presence of direct personnel, control or management relationship will result in ineligibility for bidding. As specified by the National Development and Reform Commission (NDRC) in its reply on difficult questions concerning the bidding practice, the article does not prohibit all corporations, other organisations and an individual with a stake in the project owner, or vice versa, from participating in bidding.

Instead, two conditions must be met for such prohibition to take place, namely, “having a stake” and “may affect the fairness of bidding”. If the bidder had a stake in the project owner, or vice versa, but the bidding was carried out in compliance with the law, the procedures were well-regulated and such stake did not affect the fairness, the bidder would be deemed eligible. To avoid compliance risks, however, it is still necessary to assess the possibility of affecting fairness.

Continually optimise the bidding-based procurement compliance management process.

Driven by the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council, the SOE bidding-based procurement mechanism has been continually improved. But imperfections have persisted in several areas including policy deficiencies, inadequate performance of duties, and lax internal supervision.

Therefore, SOEs should, in accordance with the Measures for the Compliance Management of Central Enterprises and other relevant requirements, create and keep refining the bidding-based procurement compliance management process.

The organisation responsible for the bidding and its related duties, the scope of bidding, and specific operational procedures should be clarified, with proper emphasis on risk prevention, governance and supervision in the bidding process.

In addition, SOEs should identify the prohibited behaviour in bidding, and the corresponding punitive measures and compensation liabilities. To truly meet the relevant compliance management requirements, a functional mechanism for bidding-based compliance management should also be established and fine-tuned alongside systems for compliance risk identification, warning, response, review, assessment, reporting, training and compliance culture.

Xiong Xiaorong is an associate at Blossom & Credit Law Firm